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ETS Around the World

Marissa Santikarn, ICAP Secretariat

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Präsentationsnotizen

Good afternoon...introduction ICAP: intergovernmental forum that brings jurisdictions together that have an interest in or operate an ETS. It gives policymakers an opportunity to exchange knowledge and best practices on various elements of an ETS. Today I would like to talk to you about some recent policy developments in emissions trading world wide.

Outline

1. Around the world with emissions trading: 17 systems across 4 continents

2. Europe & the periphery 3. North America 4. Asia Pacific

International Carbon Action Partnership 2


Emissions Trading Worldwide: 10 years on...

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It has been 10 years since the first emissions trading system for GHG emissions was launched in 2005. As you can see from the ICAP map, these systems have spread across the world with 17 systems currently in operation. This is set to grow even further with jurisdictions like China and Ontario scheduled to launch an ETS in 2017 and many more jurisdictions are also looking into the role an ETS can play in driving the transition to the low/carbon economy, such as Thailand, Russia and Mexico.

Global Trends: A snapshot of 17 systems

International Carbon Action Partnership 4 Source: ICAP Status Report 2016

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Just to give you the broad brushstrokes of the kind of systems we have in operation worldwide..Here we can see that both the number of ETS and the emissions they cover have been steadily climbing, starting with the European system in 2005, to new systems cropping up in North America and New Zealand and most recently in the past five years we have seen a number of systems coming on line in Asia – such as the newly launched Korean ETS as mentioned by Figueres this morning. Together, these 17 systems come from jurisdictions that make up 40% of the global economy...with China expected to launch ist national system in 2017, this number will jump to almost 50%. Finally, these systems, as you will also see later on in the presentation, can be designed to fit the unique political and economic conditions of each jurisdiction. There is no one size fits all solution, an ETS can be a very flexible system that nevertheless puts a price on carbon to send a signal to businesses to reduce their emissions. We not only have systems operating in cities, such as Tokyo and Beijing, they also exist on the subnational level in provinces like Ontario, as well as national and supranational systems like the EU. They often cover the power and industrial sector, but can also be designed to cover other sectors like aviation and even forestry. More information on the details of such systems can be found not only in the ICAP Status Reports, but also our recently launched ETS handbook in conjunction with the World Banks Partnership for Market Readiness. Now I would like to dive into these 17 systems and go through some of the latest developments in each of these systems.


Europe & the Periphery

• The EU ETS is currently undergoing a process of structural reform

• 2030 Climate and Energy Framework: • At least 40% reduction of GHG

emissions EU wide • Translates to 43% reduction for

EU ETS sectors • Tighten cap: annual reduction factor

increase from 1.74% to 2.2% • Current price around €6

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Lets start with the oldest and largest carbon market in operation: the EU ETS. As many of you are well aware, EU leaders have agreed on their GHG reduction targets for 2030 as part of the 2030 CE Framework, committing themselves to a reduction of AT LEAST 40% of GHG emissions by 2030. This translates to a 43% reduction for the sectors covered by the EU ETS. In order to ensure the EU ETS achieves these targets, the EU is currently undergoing a process of structural reform for the system beyond 2020. Currently, prices in the system are around 6 EUR, but as most of you know, the market has not been without its up and downs. In an attempt to address fluctuations in supply and demand and to address the structural imbalances in the European carbon market, a Market Stability Reserve will start operating at the beginning of 2019. Rather than control the price of allowances directly, it focuses on the number of allowances in the market, adding to and withdrawing allowances from the reserve along predefined quotas. Over time, the MSR also aims to address the current surplus of roughly 2 billion allowances. The 900 million backloaded allowances, as well as the unallocated allowances for new entrants or from plant closures will also be included in the MSR. The talks on the MSR have also paved the way for a broader discussion on broader reforms for the EU ETS, based on the Commission‘s proposal last year.



• July 2015: EC legislative proposal for post 2020 EU ETS reform

• Free allocation: benchmarks updated more frequently, revised carbon leakage list

• New low-carbon technology innovation fund

and a new modernization fund to help lower-income member states with their energy systems.

• Concluded linking negotiations with Switzerland

after 5 years of negotiation – timetable open for signing and ratification of link.

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The EC’s legislative proposal for changes to the EU ETS post 2020 came out last July and marks the first major step in the structural reform of the European carbon market. I would just like to focus on some of the proposals put forward: namely, changes to the allocation method and revenue use under the EU ETS. Currently, a portion of allowances are allocated freely in the EU ETS and the commission has proposed to update the method of free allocation. If these proposals are accepted, benchmarks would be based on the best available technology and both the benchmarks and production data would be updated more frequently (every 5 years). The Commission also proposes a revisal of the carbon leakage list. For instance, for entities to qualify, they must reach certain carbon AND trade intensity thresholds. Secondly, two new funds have been proposed: a low/carbon technology fund and a modernisation fund to help lower income MS transform their energy systems. Finally, the European carbon market is also set to expand even further, as linking negotiations with Switzerland were concluded earlier this year. Although a link is not yet operational, the treaty is now open for signature and ratification. The timetable for this is open. France looking for support for EU ETS wide price floor, unclear level of support this will get. Also introduced proposal for a national price floor set at around 30 EUR in its 2017 finance bill (which will only apply to CO2 from coal combustion and other fossil energy to generate electricity. UK has a domestic price floor of around 25 EUR.



• Kazakhstan • System suspended until 2018 to improve the MRV

system, overall GHG regulations and functioning of Kazakhstan‘s ETS

• Turkey

• Comprehensive, mandatory MRV system in place with reporting of 2015 emissions starting this year

• Working on a series of reports on emissions trading in Turkey

• Plans to simulate ETS • Ukraine

• Plans to establish a national ETS that can be linked to the EU ETS

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Extending our focus further afield, developments are also afoot in the European periphery. Kazakhstan, which has been operating a national ETS, has temporarily suspended its system until 2018. During this time, they will work on improving the overall functioning of the system. Although the MRV regime will still operate during this period, it is not clear how enforcement will work in this two year timeframe. Turkey, who has been working on developing market mechanisms with the World Bank PMR, is also making strides in its ETS development, with a fully functioning MRV regime that started data collection this year. It is also working on a series of reports and ETS simulations to see the impact of an ETS in Turkey. As part of the Association Agreement between the EU and Ukraine, it is developing an ETS that can be ilnked to the EU ETS. Although work is still in its preliminary stages, Ukraine does have a draft concept for its national system, starting with a pilot phase that focuses first on large installations. Expanding later to include SMEs. A draft concept for ETS implementation has been developed that provides a vision of the key objectives, decisions to be taken and expected outcomes. Emissions trading would be the main national policy instrument to harness the low-carbon potential of Ukraine’s energy-intensive sectors by 2030. The ETS will also help Ukraine fulfill its international obligations with regards to emissions reductions, as well as channel carbon finance and investments into low-carbon and energy-efficient technologies.��The draft concept suggests starting with a four-year pilot phase. In the first year of the pilot phase, it will only cover large installations (>50MW) in the power and heat generation, as well as the industrial processes sectors. In the next phase, the system will expand to include small- and medium-sized installations (20-50 MW). The concept proposes allocating 90% of allowances for free and auctioning the remaining 10% in the pilot phase. A new entrants reserve will also be established. The national allocation plan will be further developed based on EU ETS methodologies and practices; however, these will be adjusted to suit national circumstances.�As a first step, separate legislation would be passed to regulate GHG emissions, enforce the ETS and transpose the relevant EU Directives.


North America: California & Québec

• Both systems have been linked since 2014 • Operating joint auctions • 2015: Cover the transport sector by including

fuel distribution (~85% coverage) • High compliance rate • Price around USD 12.70 • Joint carbon market to grow even further

following establishment of ETS in Ontario…

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Lets move across the Atlantic to North America, where there are two major carbon markets operating in both the US and Canada: the Western Climate Initiative and the Regional Greenhouse Gas Initiative. The most active members of the WCI are California and Quebec who have operated a joint carbon market since 2014 and also hold their auctions together. Last year they also extended their sector coverage to include fuel distribution, covering around 85% of their economies. Prices are currentl around USD 12.70, tracking close to the auction price floor. The system has seen a high rate of compliance and there are plans for the market to expand even further with the inclusion of Ontario


North America: Ontario

• 18 May: Ontario passed cap-and-trade regulation, program starting in 2017, largely based on program design in Québec & California

• Link with QC & CAL planned for 2018 • First compliance period: 2017-2020 with initial allowance

cap of around 142m tCO2e • Coverage: power sector, industry and petroleum product

suppliers

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Compliance period: Three years starting 1 January 2017 with an annual compliance deadline of 1 November the following year. Coverage: The program will cover CO2 emissions from the power sector (including imported electricity and natural gas distribution), industry and petroleum product suppliers. The inclusion threshold is set at 25,000 tCO2e annually. However, entities emitting more than 10,000 tCO2e annually can voluntary opt-in to the program. Allowances: The government will issue 142,332,000 allowances in 2017, with the total number of issued allowances declining 4.2% annually until it reaches 124,668,000 allowances at the end of the first compliance period in 2020. Allocation: �Free Allocation: For manufacturers and electricity generation from biomass is likely. The list of entities receiving free allowances will be reviewed in 2020. Entities will have until 1 September preceding the vintage year of allowances to apply for free allocation. Free allocation will be based on four different methodologies: Output-based benchmarking, energy-use based allocation, historical emissions levels (‘grandfathering’) and direct allocation based on actual emissions. Emitters that opt-in to the program can apply for free allocation, which will be based on either output-based benchmarking or energy use. New entrants will not be eligible for free allocation for the first two years of their operation.�Auctioning: The remaining allowances will be auctioned quarterly. 10% of allowances created with a vintage three years later than current auction year will be reserved for auction. The minimum auction price will increase 5% annually in addition to inflation. The 2017 minimum price will be based on the 2016 CAD 12.82 set at the Québec carbon market auctions, plus a 5% increase and inflation. Offsets and Credits: Covered entities can use offsets or Early Reduction Credits (ERC) to meet 8% of their compliance obligation. A separate offsets regulation will be proposed later this year. ERCs will be capped at two million credits. Participants can apply for ERCs based on demonstrable emissions reductions from 1 January 2012-31 December 2015


North America: RGGI & Clean Power Plan

• Covers power sector with almost 100% auctioning • Currently undergoing broader system review to see

how program should be adapted to comply with the Clean Power Plan and look at cap stringency post-2020.

• The review will also consider • Cost Containment Reserve: how it has

worked to date and interactions with CPP

• Offsets and compatibility with CPP • Control periods: currently 3 years

• Price around USD 5

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According to targets set by the EPA, a mass-based approach would give the RGGI states a target of 79 million tons by 2030. This is one million tons higher than the current RGGI cap set for 2020 without offsets or allowances from the Cost Containment Reserve (CCR). As the CPP target would be met by the RGGI states ten years earlier, the cap in relation to CPP goals will be a key feature of the review. The program review will also evaluate its flexibility mechanisms: ��(1) The CCR. This holds a fixed supply of allowances that become available for sale when the auction price reaches a certain trigger point (USD 6 in 2015). The review will examine how it has worked to date and how it will interact with the RGGI cap under the CPP. ��(2) Offsets. The states are seeking feedback on the future use of offsets given their incompatibility with the CPP. Although no offsets have been issued thus far, RGGI participants are currently allowed to use offsets from five categories to meet up to 3.3% of their compliance obligation. ��(3) Control Periods, which are currently three years long, although each installation must hold allowances equivalent to 50% of their obligation for the first two calendar years of the total three year period. � Other technical design features that RGGI is seeking feedback on include: regulated sources considering RGGI covers more sources than the CPP such as simple cycle and biomass; participation in the EPA’s Clean Energy Implementation Program; possible expansion of RGGI to include other states; and the RGGI system for allowance auctioning and register.�

North America: US (National Level)


EPA-Clean Power Plan

• Regulate GHG emissions from existing power plants, aiming for 32% reduction in electricity sector emissions by 2030 compared to 2005 levels.

• States can have a rates or mass based target • Flexibility: joining with other states in an ETS like RGGI -> CPP implementation currently stayed by Supreme Court

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Compliance plans must be implemented no later than 2022. For states that do not submit plans, the EPA will impose an implementation plan. On 9 February 2016 the U.S. Supreme Court voted 5-4 to issue a stay on President Barack Obama’s Clean Power Plan (CPP), delaying its enforcement until an appeals court can rule. The 27 states that brought the case to the Supreme Court argue that the Clean Air Act does not give the U.S. Environmental Protection Agency sufficient authority to regulate state carbon emissions. The regulation will now have to wait until the Washington D.C. Circuit Court has heard and rejects the challenges to go into force; oral arguments are scheduled to begin on 2 June 2016.


• New Zealand • Currently undergoing system review • Debate on continued use of transitional measures like 2-

for-1 surrender obligation • Debate on use of international offsets (not allowed since

May 2015) • Price around 9.5 USD

• Australia - Emissions Reduction Fund replaced ETS (abolished 2014) - National elections July 2: Opposition party has proposed 2

ETS (one for heavy industry, one for electricity sector)

Asia Pacific

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ERF: Reverse auctions with AUD 2.55bn fund for private sector emissions reduction projects, also developing baselines to ensure that emissions reduced with ERF are not undermined with emissions gains elsewhere.


• South Korea - System start: January 2015,

covers 525 entities from 23 sectors (around 2/3 of national GHG emissions)

- Responsibility shifted to Office for Government Policy Coordination (OGPC) under the Prime Minister

- Ministry of Strategy and Finance in charge of allocation

- Enforcement shared with Finance, agriculture, environmental, transport ministries

- Price around 11 USD

Asia-Pacific

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Korea 60% Emissionen abgedeckt Downstream 100% freie Allokation


China • US-China Declaration, 2015: National Chinese ETS

starting in 2017 (design not yet finalised) • Coverage: power generation, iron and steel,

chemicals, building materials, paper making, non-ferrous metals

• Currently in the process of MRV/data collection • Estimated size: 3-4b tCO2e, • Estimated 10,000 entities • 7 Chinese pilots successful in

capacity building and testing various design elements

Asia-Pacific

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NDRC has submitted core legislation to State Council but law is unlikely to be passed until 2017 Still need more detailed legislation on MRV, allocation and market oversight 3 pilots have extended their compliance periods, likely that the others may follow suit. Unclear how exactly they will be integrated into national system.


More information on ETS • ICAP interactive world map

• Latest information on existing and planned systems

• ICAP Status Report Emissions Trading Worldwide • Detailed factsheets on all systems,

infographics and articles on the latest trends in ETS

• ICAP-PMR ETS Handbook ‘Emissions Trading in Practice’

• Newsletter “Global Trends in Emissions Trading”

www.icapcarbonaction.com

https://icapcarbonaction.com/ets-map


Thank you

www.icapcarbonaction.com [email protected]

@ICAPSecretariat

http://www.icapcarbonaction.com

mailto:[email protected]

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